Copywritten by Equitrend, Inc. in 2006.
It's important to know what happens to your money during a bear market. The money you put in and the money you get back are not the same. If you put $100 into an investment and it went down 50%, from $100 to $50, what rate of return would you need to get back the $100 you put in?
When you lose money, you need a much bigger return on the money you still have to get back what you lost. In this case, you would need a 100% gain on the $50 you still have to get back the $100 you put in.
When we look at past bear markets in the United States, we can see that it can take between six months and twenty-five years for the market to get back on its feet. The value of a portfolio has dropped by anywhere from 20% to 86.7%! Not a good situation for people who want to buy and hold. This is why it would be better for your finances if you never lost money in any given year and only made half of what the market did in good years. Let's talk about how this can happen. If you never lost money when the market went down, you would only need to get 38.33 percent of the gains when the market went up to match the Nasdaq 100 index's buy-and-hold strategy. Realistically, if you lost half as much as the Nasdaq in bad market years, you would only need to make 63.37 percent of the Nasdaq's gains in good market years to equal a buy-and-hold position.
The point we want to make is that you don't have to match or beat the market's performance in good years if you protect your capital in bad years. Protecting your money during times when the market is down will help it grow faster over time.
The goal of any strategy for timing the stock market should be to reduce risk and increase returns, with reducing risk being the most important factor. If all other things are the same, you want to invest in the strategy with the highest return and the least risk.
You may be reading this today because you are tired of a bear market taking all of your money or the money of your clients. You may even be in a situation where your retirement has been cut so much that you have to change your plans for when you retire.
No matter what your reason is, Wall Street's "buy and hold" (also called "buy and hope") myth is not the best way to grow and protect your assets.
